On December 17, the House passed the Protecting Americans from Tax Hikes (PATH) Act of 2015, which will substantially change how small insurance companies are taxed. The Act contains an option for small insurance companies to recognize only investment income rather than a broader income definition. It also raises the premiums limit under section 831(b) and addresses qualification for that section. In addition, an insurance company must satisfy one of two tests to comply with a new diversification requirement.

“I think the legislation seems practical; while it still narrows the eligibility provisions, it provides an alternative test,” Tax Shareholder Susan E. Seabrook explains. “These changes, coupled with raising the premium cap, seem like a good compromise.”

The Act came about partially in response to increased IRS scrutiny and audits of small insurance companies and estate planning abuses. Under the Act, the IRS must collect information on the diversification test.

“I think the reporting requirements will provide the IRS with a much more efficient process to determine if the arrangement is problematic and if it is insuring real insurance risks," Seabrook says.